Jon Huntsman, Jr., the former candidate for the Republican presidential nomination, says the ongoing European financial crisis is “deeper than we fully realize” and that no solution will work without injecting economic growth into the continent. He made the comments in an interview with Knowledge at Wharton during the recent Wharton Global Alumni Forum in Jakarta. Huntsman also discusses lessons from the Asian financial crisis that might apply to Europe and his concerns about slow economic growth in the global economy. An edited transcript of the interview appears below.
Knowledge at Wharton: How optimistic are you about the European business environment today, as compared to a year ago?
Jon Huntsman, Jr.: I’m not at all optimistic. I think it’s a lot deeper than we fully realize. You’ve got sovereign debt problems that are on top of traditional banking problems, that are on top of serious growth problems. And you’re not going to solve the former two until you figure out how to grow. And growth is not going to occur until such time as governments promulgate some pro-growth policies, which are a ways off.
So I would say this year probably is as bleak as we’ve seen in a very long time. But we’re going to have to figure out how deep the crisis is, and whether it’s Greece, or Greece and Spain, Spain and Italy, the third- and fourth-largest economies of the eurozone — whether or not that impacts France, for example. What, in other words, the metastasis is ultimately. But I think we’re a long way off from being able to make any real sense of it.
Knowledge at Wharton: You mention growth policies. Is that as opposed to the austerity policies that are going on now? How would you change the policies that are largely in effect right now?
Huntsman: I think there has to be a sense of predictability going forward, from a regulatory standpoint, from a tax policy standpoint, and from an over the long-term austerity standpoint. It’s one thing to have a certain out-of-kilter, debt-to-GDP ratio. But beyond that, what is your investment regime going to look like? Is it going to stay consistent and bankable, investable, for more than just a year? I think all these things are going to be terribly important to the investor community going forward. And with the unpredictable nature of where some of the economies are in the Eurozone, getting any of those longer term policies in place that will really give the sense of confidence to the investor community really is almost impossible.
Knowledge at Wharton: So those are longer-term fixes that you think are necessary for a sound, fundamental change. But there’s also a critical short-term problem. Are there any specific policies or changes in policy that you would recommend to help in, let’s say, the next six to 18 months?
Huntsman: How do you stimulate investment? You stimulate investment by creating an economy that is conducive to investment. Capital’s a coward, let’s face it. It’s going to flee wherever it perceives there to be risk in the marketplace and find a safe haven. So how do you make your economy a safe haven? It’s generally done by tax policy, by investment regimes that are improved, either through transparency or trade and investment facilitation measures. So all of those are things that can be looked at and implemented. But again, the market is going to say, “That may be a quick fix, and it may be something that I can’t bank on longer term.” I think that really is the problem in the eurozone right now — how do you promote enough in the way of confidence in your longer-term policy-making so that it isn’t one regime overtaken by another a year or two from now that will come in with completely different policies. That’s the fix that they’re in.
Knowledge at Wharton: Even if you were able to have a strong pro-investment policy, and even if there were confidence that it was going to be there in the medium and long term, would businesses still invest, given the lack of demand on the part of consumers that is the case right now?
Huntsman: That’s another side of the equation, the whole demand side of the economy, and the high levels of unemployment, and the missed opportunities on the human capital side. So it’s a serious, serious set of circumstances right now. I think we’re years away from any kind of settling out or ultimately calming effect that would provide enough in the way of confidence and longer-term policy-making transparency, where investment is going to be attractive in any serious way.
Knowledge at Wharton: What features of the current crisis in Europe concern you the most right now?
Huntsman: I’d have to say the high levels of unemployment and the displacement on the social side. Because that leads to what I would consider to be unpredictable outcomes in terms of social unrest. It’s one thing to deal with the economic side numbers that just aren’t looking good. It’s another to look at the social implications of high unemployment like we’re seeing in Greece and Spain, and the unrest that this could very well trigger.
Knowledge at Wharton: Many people probably don’t realize that in Spain and Greece the unemployment rate is (around) 25% — around the levels that the U.S. saw during the Great Depression, and for youth unemployment, it’s above 50%. If you were in charge, is there anything you would do directly policy-wise to attack those specific problems?
Huntsman: Far be it for me to advocate anything in Europe beyond which they’re already looking at. But clearly, you’ve got to attack debt. You’ve got to figure out how to get your debt-to-GDP into some sort of manageable number that speaks to longer-term confidence. Then you’ve got to attract investment. You’ve got to have seed corn with which to build your economic base and change the fundamentals, and put people back to work. Investment isn’t coming in until there’s a clearer picture of where the economies are going longer term. Again, that gets right back to debt. With a higher debt-to-GDP ratio, the longer-term outlook is very, very bleak. So I think I would attack the debt side first, knowing full well that that could boost a little bit in the way of longer-term confidence, bringing in investment that could ultimately settle out the unemployment problem.
Knowledge at Wharton: Isn’t that what they’ve been doing? Decision-makers in Europe have advocated debt reduction, austerity and reducing budget deficits, which has made unemployment worse. Is there some way to avoid the short-term spikes in unemployment?
Huntsman: I think you’ve got a broader architectural overlay that is altogether problematic that we aren’t talking about. And that is: What about the eurozone? What about the fiscal and monetary union? What about the euro? These are all issues beyond the individual economies that have to do with the regional architecture, that have got to be resolved. And many say today, “Well, it was a failed start.” It’s okay to call it a failed start today, but what do you do about it?
So before you really start drilling down on the individual member states and some of their problems, you’ve got to deal with the problem of Europe and what it means to be managed economically within a common market or a common framework that doesn’t seem to be working out so well. So who do you call? Do you call Brussels? Do you call the nation’s capital that you have queries about? You’ve got the overlay of 27 countries in the EU, to say nothing of the 17-member eurozone, that each has bureaucrats in Brussels that handle the various aspects of economic trade and foreign policy. So it’s a top-heavy system. It’s really difficult to talk about how you bring back to life an individual nation-state when you’ve got this architectural overlay that really is failing the region in a very serious way.
Knowledge at Wharton: One of the solutions that seems to be talked about very broadly is this idea of sharing fiscal responsibility, spreading it out, approaching it as more of a whole rather than in individual parts. What do you think of fiscal union?
Huntsman: Well, to have a successful fiscal union, like the United States has a fiscal union, you have to have labor mobility, just to begin the conversation. I don’t think Europe has anywhere near the labor mobility that you need to make it work. You’ve got to have some recognition that the wealthier states are willing to somehow subsidize the weaker states. We do in the United States without really calling it that. But that’s kind of how our system of subsidies out of Washington, taxation to Washington, and then payments back to the states really works.
Knowledge at Wharton: So in your opinion, for Europe to work, they should be doing that?
Huntsman: Absolutely. And in order for all of this to work, you’ve got to have a stronger political union to back everything up. It’s as if you had a couple going out to be married, not yet finalized, yet you take out a joint checking account and you begin transacting business with all the uncertainty that this then entails. You can only go so far with a fiscal and monetary union without a strong political union to provide the cohesiveness. And that’s where the cart has been put before the horse, so to speak.
And I’m not sure, longer term, that a political union, the kind that would be necessary in terms of the innate inherent cohesiveness, is going to be there to support an economic or a fiscal union longer term.
Knowledge at Wharton: If they don’t have the cooperation to achieve that, does that mean that the alternative is some kind of a two-tier system? You would end up with a two-speed system where largely northern Europe economies and maybe the periphery operate as a separate unit. Does it seem that you either go more towards this fiscal union, towards more cooperation, or you’re going to end up being forced apart?
Huntsman: I think that’s exactly right. And I’m not sure that a 70-year experiment — let’s just take it from post-World War II, from the Bretton Woods period right through to the accords of the early 1990s, the Maastricht Treaty, and then take that through to today — I’m not sure that the leaders of Europe are going to easily dismiss what has been the most important experiment economically and politically in Europe since World War II, and maybe in 100 or 200 years.
I think they will endeavor to make it work so that you don’t end up with a two-tiered system. I think that’s terribly problematic from a currency standpoint and from a trade and investment standpoint. But then they’re going to have to deal with Greece. And in order to deal with Greece, so that they don’t fall out of the eurozone, someone’s going to have to back-stop the numbers. And there’s only one country that can do that — Germany.
And then, in Germany, you have to conclude that what is an economic problem for most others becomes a political problem for Angela Merkel. She can’t very well make the sale on the streets of Berlin when they say, “Well, gee, in 2000, we were the problem economy, and we did what was needed to be done in the interim in terms of austerity, in terms of getting our balances back in working order. And you want us to do what? You want us to subsidize those who aren’t willing to step up and embrace those difficult measures that are needed, as we did?” That becomes politically untenable. And so that’s kind of where we find ourselves today [with] an economic problem that fundamentally becomes a political problem for Germany, and a relative stalemate. The European Central Bank is trying to create a wall, a backstop, to the best of its ability, with certain member states playing a supporting role to insure that, trying to keep contagion from breaking out.
Knowledge at Wharton: Asia suffered a financial meltdown in the late 1990s and took certain measures to recover, relatively speaking, fairly quickly. Are there lesson from the Asian financial crisis that are relevant to Europe’s current economic woes?
Huntsman: Maybe some. The Asian crisis was followed by some serious austerity and getting their balances back in working order — very aggressively, I might add, to the point where, for example, the South Koreans were very angry at the IMF and the United States for the tough medicine that they advocated. But they got through it.
They probably got through it better because, relatively speaking, many affected were smaller economies. They’re also newer economies. They didn’t have as much drag in their systems as you find over in Europe. It’s also a more buoyant region in terms of inter-Asian trade and investment flows. So to some extent, I think you could say they had imbalances. They addressed the imbalances. They took some really tough steps that were advocated by the IMF, the United States and others. And they got back in the game. But there were also some factors that would have made them a different set of circumstances in Europe.
Knowledge at Wharton: Probably the biggest being the fact that they could devalue their currency, which Greece cannot. For example, Thailand, which actually kicked off that crisis and probably suffered some of the worst effects — devalued by about 80% against the dollar. There’s Greece, stuck, unable to do that.
Huntsman: Ramping up exports is a way of getting back on their feet again.
Knowledge at Wharton: China and India both helped to prevent the global financial crisis from becoming much worse. Now both are slowing down. So on top of the crisis in the eurozone, things seem to be going in a negative direction in a lot of regions. What do you see for the next year or so in the global economy, given where the momentum’s heading?
Huntsman: Well, you have to ask yourself the question, “Where are the engines of growth?” The global economy has had, in recent years, some reliable engines of growth to pull those economies that were performing at lesser levels along. But you’re hard pressed to see any engines of growth today. China will remain reasonably strong. They may not put in an 8% number or a 9%, but certainly probably a 7% or 7%-plus number, which is way down historically from where they’ve been over the last 30 years. India’s down probably by a factor of 30% to 40% in terms of their own growth numbers.
So where are the engines of growth? And I think that’s bad news for the global economy. You may get by with 1.5%, maybe 2% [global economic growth] if you’re lucky, waiting for the traditional engines of growth to re-fire themselves and get moving again. But I think the next year or two are going to be very tough for the global economy. I think that a lot of it will depend on how quickly the United States gets back in the game.
Knowledge at Wharton: Not that the folks in Western economies are in a good position to give advice to Asia, but if you were going to suggest some policy changes for Asia, let’s say for China or India, what might they do?
Huntsman: I would say streamline investment regimes, introduce greater transparency into the system, open financial services markets, insurance markets, do a better job protecting intellectual property rights, and quit manipulating your currency to the extent that you do.
These are all probably steps that would enhance the prospects of both countries, China and India, longer- term. They’re hard to do, particularly during periods of uncertainty, when your export markets are less reliant today than they were just a few short months ago, even. You’re going to think inward. And you’re going to resort more to protectionist measures. You’re going to be more inclined to manipulate your currency and to keep closed some of those markets that, even under WTO agreements, you agreed to open at some point. So we’re at an important time in terms of whether or not some of the newer emerging economies are really willing to step up and show their commitment to growth and to reform and to economic openness.
Knowledge at Wharton: So one might expect you can look forward probably to increasing trade frictions as a result of the slowing global economy in general?
Huntsman: That generally follows.
Knowledge at Wharton: And what do you think the odds are that China will try to rebalance its economy somewhat, as many people say is the way for them to get to the next level, to a more consumer-oriented economy, as opposed to export-led?
Huntsman: Well, the evidence is there that they’re in that transition, to some degree. When they announce stimulus measures as they did about three weeks ago to incentivize consumers to buy more in the way of household appliances, televisions, big screens, consumer goods you know they’re taking this transition seriously. And they have to, because the math just doesn’t work for them any other way. You can’t maintain their current trajectory as just an export power and expect to deal with the demographic changes that lie on the horizon.
When you’ve got more people leaving the workforce than you have entering the workforce, your costs are going to increase. And labor rates, indeed, in the southern manufacturing zones around Guangdong and beyond were seeing prices escalate. I think that’s because of the upside-down demographics that China is just on the front end of experiencing. So you’ve got longer-term four grandparents, two parents, one wage earner. You’ve got an upside-down pyramid, essentially. How do you make the numbers work longer term? And how do you deal with health care costs and Social Security costs, and affordable housing costs when you’ve got real estate bubbles every now and again? They want certainty, which is tough to achieve once you’ve started that transition from an export-led economy to more of a consumption economy. But they’ve taken that risk.
Knowledge at Wharton: It sounds as if you see them as having a reasonable amount of flexibility, which maybe wasn’t there a couple of years ago.
Huntsman: Flexibility is driven by necessity, because they can’t go back to their old form of managing the economy and expect to survive longer-term. They’re in uncharted territory right now. But that’s also by necessity.
Knowledge at Wharton conducted another interview with Huntsman in April — Jon Huntsman, Jr., on Republican Politics, the U.S. Economy and China’s Transition — in which he discusses his campaign for the Republican presidential nomination, the state of the Republican Party, the jobs problem in the United States and more on China’s economy.